Clear signal is needed to keep the investment gateway open

Recent events confirm that SA’s perceived receptiveness towards foreign direct investment (FDI) is declining. As a result, some foreigners are disillusioned and look to better growth prospects elsewhere in Africa. The case of European Union (EU) investors — our single largest source by far — confirms this: aggregate EU FDI stocks in SA declined 23% in 2010-12, when their global FDI stocks increased. And that was before the legislative barrage unleashed before last year’s elections.

Photo: Jeffrey Barbee, MediaClubSouthAfrica.com

As our economy is plagued by high unemployment, social discord, low growth, and rising political populism, the signal failure to retain, let alone ignite, foreign investor interest from our major source is disturbing. But why is this the case? And will the Promotion and Protection of Investment Bill, soon to be presented to the Cabinet, change this?

Our politics have changed sharply in recent months. The African National Congress (ANC), harried by the populist Economic Freedom Fighters, is struggling to respond. Unfortunately, sensible, orthodox economic policies don’t buy votes. But the ANC is also responding to its own constituencies, large parts of which seek redistribution of wealth, or favour inward-looking, state-driven industrial policies. Substantial segments of the formal business community, hit by rising costs and regulatory uncertainty, also seek to keep the South African market as closed as possible.

The trade unions are ideologically committed to inward-looking policy approaches. The mood in many townships seems to have turned against foreign immigrants and is reinforced politically by the approach of next year’s municipal elections.

As a result, advocates of liberal economic policy approaches are in an increasingly small minority. The legislative results are rapidly mounting up: a minerals bill rewrite generating huge uncertainty in our core economic sector; announcements about land ownership and reform that have the same effect in the farming sector; foreign private security providers may shortly be obliged to sell 51% of their assets to locals; proposals to oblige foreign shop owners to transfer their proprietary secrets to locals; a revised black economic empowerment law that will make it more difficult and punitive for businesses (local and foreign) to operate; an expropriation bill whose outcome is uncertain; increasing hurdles for skilled foreigners to acquire work permits; and increasing tariff barriers.

The cumulative effect of this list is breath-taking. The South African “gateway to Africa” is becoming the gatekeeper. Strategically, this is a dangerous drift as, without our gateway status, it is not at all clear what our role in the regional and global economies would be. Also, how will our economy be affected if our African trading partners implement similar policies, or our global trading partners retaliate?

To round it off, our political elite has almost overnight taken on predatory dimensions, threatening core institutions, cementing investors’ worst fears about the legislative barrage, and inviting comparisons to oligarchical Russia. Are any assets safe in this legislative and political environment? Would you invest your money in a country in such circumstances? Foreign investors, who have many other options, are now openly asking this question. We are not China; our market is not big enough to ignore foreign investors’ concerns. We are at the cusp of a crucial turning point.

Enter the Promotion and Protection of Investment Bill. The first version, released for public comment last November, confirmed some investors’ worst fears. Expropriation was redefined to allow the state to in effect transfer custody of seized assets to deserving beneficiaries (the “custodial clause”), thereby avoiding the need to pay compensation as the state would not own the assets. This clause has reportedly been removed, but the overall treatment of expropriation remains uncertain.

The draft bill provided for foreigners to be subjected to an undefined “screening” test to ensure their investments would not violate economic or social policy goals. Several countries operate screening systems, a growing practice in light of the global expansion of many state-owned enterprises. Australia’s systems, for example, give wide discretion to the finance minister to block investments if they are deemed not to be in the national interest.

More thought needs to be given to such comparisons. Australia remains open to FDI and has strong domestic institutions anchored in democratic norms. The Australian state is not about to become predatory; hopefully SA’s will not either but its future is far less certain. Therefore, different approaches are required here.

On the plus side, the bill would entrench dispute settlement with foreign investors in SA’s legal system. This would bring the long-running bilateral investment treaty saga to a close and end the circumstance in which they enjoyed more rights than domestic investors through their recourse to international arbitration panels. SA’s legal system and judiciary have proved their independence and durability. But if a predatory elite captures SA’s democracy, the consequences for the judiciary will be uncertain. The bill could then be a pyrrhic victory.

The bill has since been debated behind closed doors in the National Economic Development and Labour Council. The resulting version is reportedly on its way to the Cabinet. How should it respond?

First, it should reflect on whether SA truly requires FDI, and in what quantities, in relation to our economic and social challenges. Second, and assuming it does the right thing by concluding that SA must remain open to FDI to cement our gateway status, the next debate should be over what safeguards really need to be in the bill in order to prevent egregious abuses by foreigners. Screening should be contemplated but must be subject to checks and balances to minimise ministerial discretion and over politicisation. This power should reside in the National Treasury, the only ministry with an economy-wide view as opposed to narrower, sectoral approaches.

Third, this debate should be predicated on a fundamental principle: foreigners should be subject to the same laws as domestic investors. Therefore, we should not single foreigners out for “special treatment”, such as technology transfer conditions or performance requirements.

Different government departments are experimenting with expropriation provisions, generating considerable uncertainty. So, finally, the Cabinet needs to send clear signals about how expropriation will be treated in the Expropriation Bill, and in the plethora of legislative actions under way. The conversation needs to take place now and a clear signal sent. Investors are risk averse and this signalling would restore their confidence in SA.

This article was originally published by Businesday Live on the 10th March 2015. The authors are Peter Draper and Azwimphelele Langalanga, researcher at the South African Institute of International Affairs.